John Doe v. Public Company Accounting Oversight Board
CASE SUMMARY
Plaintiff John Doe (a pseudonym used to protect his anonymity) seeks to stop PCAOB from continuing its unlawful and unconstitutional disciplinary proceedings. The Board’s massive investigative, prosecutorial, and pseudo-judicial powers are largely unchecked. After years of intrusive investigation, PCAOB can impose severe punitive sanctions against individual accountants and accounting firms in its regulatory ambit, up to permanently banning on an individual from associating with any registered firm, revoking a firm’s registration, and imposing civil monetary penalties of up to $1.1 million for individuals and $22 million for firms—per violation. These potential penalty amounts are 20 times higher for firms than the maximum penalties the U.S. Securities and Exchange Commission may impose.
Worse yet, PCAOB’s core executive and pseudo-judicial activity is performed and superintended by private citizens, none of whom is constitutionally appointed as an officer of the United States. PCAOB hearing officers are inferior constitutional officers who have not been lawfully appointed under the Appointments Clause of the Constitution and are unconstitutionally protected by multiple layers of protection from removal by the President.
NCLA argues that (1) PCAOB’s prosecution is being funded by money raised and spent in violation of the Appropriations, Taxing, and Spending Clauses of the Constitution and the separation of powers principles enshrined in those clauses; (2) PCAOB’s disciplinary proceedings deprive the Plaintiff of his Seventh Amendment right to a jury trial ; and (3) PCAOB’s disciplinary process is systemically biased, secretive, and unfair in violation of the Fifth Amendment’s Due Process Clause and the 2002 Sarbanes-Oxley Act.
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CASE STATUS: Active
CASE START DATE: January 19, 2023
DECIDING COURT: U.S. District Court for the Northern District of Texas
ORIGINAL COURT: U.S. District Court for the Northern District of Texas
CASE DOCUMENTS
January 19, 2023 | Complaint for Injunctive and Declaratory Relief
Click here to read the full document.
PRESS RELEASES
January 19, 2023 | NCLA Challenges Modern Star Chamber Proceedings at Public Company Accounting Oversight Board
Washington, DC (January 19, 2023) – The New Civil Liberties Alliance filed a complaint today in the U.S. District Court for the Northern District of Texas seeking declaratory and injunctive relief from the Public Company Accounting Oversight Board’s secret, unaccountable, and inherently biased prosecutorial processes. With no meaningful supervision by any government official appointed or directly removable by the President, and using funds raised by private taxes with no Congressional appropriation or oversight, PCAOB has investigated and brought a secret prosecution seeking to strip NCLA’s client of his livelihood and impose quasi-criminal monetary penalties—without a jury trial, due process of law, an impartial adjudicator, or any constitutional accountability.
Plaintiff John Doe (a pseudonym used to protect his anonymity) seeks to stop PCAOB from continuing its unlawful and unconstitutional disciplinary proceedings. The Board’s massive investigative, prosecutorial, and pseudo-judicial powers are largely unchecked. After years of intrusive investigation, PCAOB can impose severe punitive sanctions against individual accountants and accounting firms in its regulatory ambit, up to the permanent ban on an individual’s associating with any registered firm, revocation of a firm’s registration, and civil monetary penalties of up to $1.1 million for individuals and $22 million for firms—per violation. These potential penalty amounts are 20 times higher for firms than penalties the Securities and Exchange Commission (SEC) may impose.
Worse yet, PCAOB’s core executive and pseudo-judicial activity is performed and superintended by private citizens, none of whom is constitutionally appointed as an officer of the United States. PCAOB hearing officers are inferior constitutional officers who have not been lawfully appointed under the Appointments Clause of the Constitution and are unconstitutionally protected by multiple layers of protection from removal by the President.
NCLA argues that (1) PCAOB’s prosecution is being funded by money raised and spent in violation of the Appropriations, Taxing, and Spending Clauses of the Constitution and the separation of powers principles enshrined in those clauses; (2) PCAOB’s disciplinary proceedings deprive Plaintiff of his right to a jury trial in violation of the Seventh Amendment; and (3) PCAOB’s disciplinary process is systemically biased, secretive, and unfair in violation of the Due Process Clause of the Fifth Amendment and the Sarbanes-Oxley Act of 2002.
Increasingly, Congress outsources vast governmental powers to private actors who are not elected by the citizenry nor appointed by the President. This pernicious trend has elicited understandable scorn from several Supreme Court justices, who describe PCAOB as “highly unusual” and as an “unprecedented extra-constitutional stew.”
Plaintiff John Doe is represented by a team of experienced securities law attorneys, including NCLA’s Russ Ryan, who served as Assistant Director of Enforcement at SEC and as Deputy Chief of Enforcement at the Financial Industry Regulatory Authority (FINRA), Ian Roffman of Nutter McClennen & Fish, who served as senior trial counsel at SEC, and Kit Addleman of Haynes Boone, a former Director of SEC’s Atlanta Regional Office.
NCLA released the following statement:
“We’re asking the Court to stop this outrageous example of ‘peekaboo prosecution’—private, unaccountable actors using secret proceedings to prosecute and punish people without meaningful government oversight, no jury trial, inherently biased adjudicators, and woefully deficient due process protections. The Sarbanes-Oxley Act created this uniquely extra-constitutional machinery 20 years ago, and it’s past time for the courts to shut it down.”
— Russ Ryan, Senior Litigation Counsel, NCLA
For more information visit the case page here.
ABOUT NCLA
NCLA is a nonpartisan, nonprofit civil rights group founded by prominent legal scholar Philip Hamburger to protect constitutional freedoms from violations by the Administrative State. NCLA’s public-interest litigation and other pro bono advocacy strive to tame the unlawful power of state and federal agencies and to foster a new civil liberties movement that will help restore Americans’ fundamental rights.
OPINION
December 12, 2023 | SEC Must Scrutinize Auditing Watchdog Before Offering More Funds
It’s good to be a powerful regulator that sets its own budget without much congressional oversight or a need to beg elected representatives for annual appropriations.
Most Americans are feeling the squeeze of runaway inflation and stagnant wage growth, but not the bureaucrats who regulate auditors of public companies and securities brokers.
The Public Company Accounting Oversight Board, a private corporation created by the Sarbanes-Oxley Act of 2002, posted a summary in November of its otherwise nonpublic $385 million budget for 2024, representing a 10% funding increase over the current year. That’s on top of a 12% increase last year and 11% the year before.
In just over 20 years of existence, the PCAOB has achieved an astonishing cumulative funding increase of nearly 400%—far outpacing inflation, wage growth, and even recklessly irresponsible overall federal spending.
No wonder the board can pay each of its five leaders appointed by the Securities and Exchange Commission annual salaries exceeding half a million dollars—more than the $480,000 Anthony Fauci reportedly received in 2002 as the highest paid federal government official. The PCAOB essentially has an evergreen money tree.
You might wonder where all that money comes from. Under Sarbanes-Oxley, the board assesses annual taxes on publicly traded corporations—read: shareholders—to fund the vast majority of its operations. Euphemistically called accounting support fees, these taxes require no annual approval or oversight by Congress.
The SEC is the only practical check on the PCAOB’s taxing and spending. Its commissioners approve the tax rates and budget each year, usually around mid-December. But the SEC is composed of mostly unelected regulators who select board members. And PCAOB funding doesn’t affect the SEC’s own budget, so there’s little incentive or inclination to play Scrooge.
SEC staffers presumably encourage the PCAOB behind the scenes not to get too greedy, but the SEC has approved a publicly announced budget every year except 2005. Last year, one SEC commissioner publicly dissented from the agency’s approval but was outvoted by her four colleagues in favor of business as usual. In some recent years, the SEC hasn’t even held a public hearing when considering the board’s budget, simply rubber-stamping it behind closed doors and issuing a press release.
It would be one thing if the PCAOB was firing on all cylinders—but exactly the opposite is happening.
When the PCAOB was created in 2002, it aimed to bolster investor protection through improved audit quality. In recent months, however, it has admitted that after two decades on the job, audit quality has gotten worse.
Only a few years ago, during a brief period of relatively flat growth in its annual budgets, leaders said audit quality was improving, although perhaps “plateauing.”
In July, staff released a report admitting a “concerning” and “unsettling” trend: Approximately 40% of the audits the PCAOB inspected in 2022 had significant deficiencies, up from 34% in 2021 and 29% in 2020.
In an accompanying press release, Chair Erica Williams called this trend “absolutely unacceptable,” but offered no hint that regulatory failure and overreach might deserve at least some share of the blame.
Instead, she scolded audit firms for failing to “live up to their responsibilities to investors” and demanded they “make changes to turn things around.” She has repeated the same message in several speeches since then.
This inverse correlation between profligate PCAOB spending and audit quality isn’t the only irony lost. Deteriorating audit quality has also coincided with a zealous ramp-up in enforcement activity and fines against accountants accused of audit missteps.
Whereas only a few years ago, fines against individual auditors rarely exceeded $25,000, the PCAOB now routinely demands at least $100,000—citing no empirical evidence of any positive correlation between those escalating fines and enhanced investor protection or audit quality.
Accountants who refuse these demands (or can’t pay) face years of expensive investigation and disciplinary proceedings, typically with little hope of keeping their current jobs or finding new work in the audit profession. Nearly all eventually capitulate before any hearing.
But at least all those fines help pay down our $34 trillion national debt, right? Nope. Unlike fines collected by the SEC and other government agencies—which typically go either to the federal treasury, victims of misconduct, or whistleblowers—Sarbanes-Oxley requires PCAOB fines to be doled out as scholarships to college and graduate students pursuing accounting degrees.
The SEC has scheduled a hearing on Dec. 13 to consider the budget. Here’s hoping the commissioners aren’t too swept up in the holiday spirit.
July 26, 2022 | ‘Peekaboo Prosecution’ Turns 20
Imagine a dystopian world where Congress empowers a private corporation to secretly investigate and punish members of a particular profession — say, auditors. Think of a private version of the Securities and Exchange Commission (SEC), but with evergreen funding that never requires an appropriation from Congress and with lavishly compensated personnel who are exempt from laws designed to keep governmental regulators in check.
Imagine further that this private regulator’s investigative, prosecutorial and adjudicative activity is secretly performed by staff employees with no meaningful supervision by any government official appointed by the president.
Finally, imagine being secretly prosecuted by these nongovernmental enforcers. Your case is then secretly decided by a “hearing officer” who is a fellow company employee of the prosecutors. There is no jury and not even – as self-regulators like the Financial Industry Regulatory Authority (FINRA) routinely provide – a multi-member hearing panel that includes one or two of your industry peers.
Although your accusers likely spent several years amassing their case against you, you get only six months to prepare your defense, and you can’t take depositions or obtain other kinds of pre-hearing discovery that are routinely available in court proceedings and even SEC administrative proceedings.
You’re also denied access to prior decisions where others successfully defended themselves (one of the most critical defense tools since time immemorial), although your prosecutors and the hearing officer have unrestricted access to those same secret precedents.
If you lose, your appeal is decided by the executive officers of the corporation — the same ones who hand-picked the prosecutors and hearing officer and who launched the charges against you in the first place based on secret communications with the prosecutors. And as best you can tell from public sources, no previous appeal has ever succeeded, although many provoked the officers to impose harsher penalties than the hearing officer did.
Believe it or not, this modern version of the Star Chamber already exists in the form of the Public Company Accounting Oversight Board (PCAOB) — often derided as “peekaboo” due to its acronym and infamous secrecy. Congress created the PCAOB 20 years ago this month as part of the Sarbanes-Oxley Act of 2002, and it has been controversial ever since.
The board’s first chairman resigned within a month of his appointment after reports that the SEC was investigating a public company for which he had served as audit committee chairman. The Supreme Court ruled the entire board unconstitutional for unrelated reasons in 2010, but regrettably spared it from early demise by redlining Sarbanes-Oxley to allow the SEC to remove the board’s executive officers. The result? Nearly wholesale turnover of board leadership after each of the last two changes in political administrations.
Scandal erupted again in 2018 when rogue PCAOB staffers leaked confidential board inspection plans to a former colleague then working for a prominent audit firm. More recently, liberal lawmakers have criticized the board as weak and ineffective, while conservative lawmakers have introduced legislation to fold it into the SEC to ensure tighter supervision and accountability.
Originally intended to prevent market-rocking accounting scandals like Enron and WorldCom, the PCAOB has instead targeted most of its enforcement firepower at small audit firms with limited resources to fight back — often firms owned by foreigners or ethnic minorities. Many targeted firms audit only a few tiny public companies that typical retail investors have never even heard of, much less invested in. Few board investigations expose material accounting misstatements or fraud, and fewer still involve investor losses.
Yet these investigations can drag on for years in secrecy. Targeted auditors are compelled to search for and turn over reams of private documents under threat of debarment, monetary penalties and potential criminal prosecution for “noncooperation.” They are also routinely interrogated under oath for multiple days on end. The process is so burdensome and expensive for small auditors that most eventually settle or default rather than resist, and many simply close up shop altogether.
If all this weren’t bad enough, the PCAOB’s home-court adjudication system makes a mockery of due process for the few who have the resources and fortitude to defend themselves. Auditors who endure the board’s years-long gauntlet can eventually appeal to the SEC and later to a federal court, but very few can afford the odyssey. In the board’s first 20 years, fewer than 10 have made it to the SEC and only two all the way to federal court. Nearly all of the hundreds of other board enforcement targets have capitulated or defaulted at some point, never having their cases decided by even a hearing officer, much less the SEC or a court.
It’s no wonder that then-Judge Brett Kavanaugh, while serving on the U.S. Court of Appeals for the District of Columbia Circuit, described the PCAOB as an “unprecedented extra-constitutional stew.” Congress should rewrite this unsavory recipe before the courts inevitably dump the entire crock.